Last week’s referendum in the UK and the decision for Great Britain to exit the European Union has caused turmoil in financial markets. For M&A practitioners, however, the impact is only just beginning. Here are five key ways in which Brexit will complicate cross-border M&A:
1. Deal Terms Will Need to Contemplate the Potential for Additional Exits
If you thought the UK exit was tumultuous, just imagine the complications that might result if the Netherlands, France or another EU stalwart held a referendum that allowed its voters to possibly leave the EU. M&A deals with European targets should contain provisions that contemplate these complexities and either allow the acquiror an “out” if the situation in Europe changes or that provide a mechanism to make changes if another EU member state serious contemplates an exit.
2. Taxes Will Get Complicated
The terms of UK’s exit from the EU have not even begun to take shape. At a minimum, though, the harmonized system of taxation that was developing under the EU will no longer apply to UK companies or companies with subsidiaries in the UK. Counsel in M&A transactions will need to grapple with the complexities of multiple, competing tax regimes when target companies have significant assets in both the UK and the EU.
3. Data Protection Rules Will Get Complicated
In our ever-digital world, data is everything (or nearly so). For the past decade, U.S. firms have become familiar with the EU Data Privacy Directive and its member-state implementing legislation. U.S. firms with data flows out of the EU have had to deal with the EU/U.S. safe harbor rules, to ensure that such data flows do not offend the EU requirements.
Counsel in M&A transactions will need to account for the possibility of different treatments for data flows into the U.S. from the EU and the UK and the possibility of different (or multiple) safe harbor regimes in the future. The EU safe harbor provisions will (in all likelihood) cease to apply to UK data outflows once the UK’s exit is completed, but we cannot predict what safe harbor regime (if any) will govern UK data in the future.
4. Multiple Sets of Regulatory Approvals
U.S. acquirors looking at targets with both UK and EU assets previously could look to a single set of EU regulators for deal approvals. Post-exit, there will be at least two sets of regulators whose approval may be required for the acquisition of mixed UK/EU companies.
5. Multiple Sets of Local Counsel
U.S. acquirors doing deals in the UK before Brexit could often hire out European firm to provide pan-European local counsel services for the deal. Most UK law firms had developed continental offices to facilitate deals across borders.
Post-Brexit it is more likely that U.S. acquirors will need to retain both UK and European counsel (or at least involve the continental partners of UK law firms). While law firms with offices in both the UK and Europe will have an advantage in providing cross-border advice, the coming divergence in legal systems between the UK and the EU will require an increased level of effort from lawyers in both regimes in M&A deals that span the UK and the EU.